News January 2007

KKR Tipped As Merck Seeks To Sell Its Generic Drugs Unit

Novartis and Teva, the drug groups, and private equity firms including Blackstone and KKR are among those expected to bid for Merck’s generic drugs business, in a sale that could top €4 billion (£2.7 billion).

Merck has hired Bear Stearns, the investment bank, to sound out potential bidders, but the process is still at an early stage and an information memorandum is yet to go out to any suitors.

A source said: “The family has given them the go-ahead to hire banks and evaluate a sale. All the usual suspects will take a look at it.”

Among those expected to express interest in the unit are the world’s two biggest makers of generic drugs, Teva, of Israel, and Novartis, of Switzerland. The unit in 2005 had sales of €1.8 billion, nearly a third of Merck’s total revenues.

Novartis last year bought Hexal, the generics company, for $8 billion. In October, Barr Pharmaceuticals, snapped up the Croatian drugmaker Pliva for $2.5 billion (£1.28 billion) in a hotly contested bidding battle against Iceland’s Actavis and KKR and Blackstone.

Merck, which declined to comment yesterday, is one of Europe’s oldest drug companies, but its biggest business is making the crystals used in flatscreen television displays and mobile phones. Bankers say that the company has long considered a sale of its generics business, but that the Merck family, which owns some 70 per cent of the parent company, has been unwilling to sell. It preferred instead to maintain a diversified portfolio of businesses, including both chemicals and drugs.

Merck is under pressure to cut its debt following its surprise acquisition of Serono, the Swiss biotechnology business, for $13.3 billion last year after failing to buy the rival Schering.

Bankers said that a sale of its generics business made strategic sense because it would be hard for Merck to grow in generics without making acquisitions. One banker said: “The problem is, if they try to do something it would be very expensive and they don’t have the balance sheet any more, so holding it strategically doesn’t make sense.”

Novartis declined comment on the sale of the Merck business. However, the Swiss drugs company has invested significantly in generics recently because of its attractive growth rates and growing demands for lower-cost generic drugs from healthcare providers.

Merck’s decision to sell came as it emerged that two private equity alliances were set to submit preliminary bids for Akzo Nobel’s Organon prescripton drugs unit by a deadline of January 15, according to sources.

Akzo, which has said that a flotation is its preferred option, would not comment. The initial consortiums include KKR with Warburg Pincus and CVC Capital Partners, while Blackstone has teamed up with Bain Capital, Alpinvest, Apax and Texas Pacific. The private equity firms either declined to comment or could not be reached.

Akzo’s sale of Organon has prompted speculation that the Dutch company could be preparing a bid for Britain’s ICI.

Source http://business.timesonline.co.uk/